Project Finance Documents
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Project Finance Documents Overview
Our Project Finance Services provide clients with advantages that aren’t possible with other financings. We are able to raise tremendous amounts of long-term equity and non-recourse or limited recourse debt, enabling us to fund large projects while at the same time protecting our client’s balance sheet.
The key to shielding project sponsors from recourse liability are well developed Project Finance Documents. To protect our clients we negotiate Project Finance Documents on their behalf to ensure they are well conceived and well written. We use the Project Finance Documents to allocate risk among the participants, thus enabling project sponsors to undertake larger, higher-risk projects than would otherwise be possible.
Project Finance Documents apply strong discipline to the contracting and operations phases of Project Finance. The documents also mandate the participation of several key private sector participants in the deal which enables us to further allocate risk. The Project Finance Documents can also be used to require host country participation which has the effect of limiting a great deal of the political risk typical of projects in emerging markets.
One disadvantage of Project Finance Documents is that they typically require supervision of the project management and operations that are considered intrusive. However, on balance, well-conceived Project Finance Documents are one of the keys to successfully delivering project funding and should be embraced by the project sponsors and project participants alike. Project Finance Documents are summarized below.
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Why choose Global Trade Funding for international project finance lending? We offer unparalleled project finance underwriting expertise. Our Project Finance team, which has several decades of senior project finance underwriting experience at some of the world’s biggest banks, provide our clients with countless advantages every time we fund a project finance loan. Our expertise uniquely positions us to pre-underwrite every Project Finance Request we receive.
Within 24 hours of receiving a request for project financing, we begin pre-underwriting the project and identify challenges to successful financing. We work with the project sponsors to best structure project parameters, minimize and allocate risk, and present the project loan package to our worldwide network of lenders and investors. The result for our clients? Project Finance loans with the best pricing, best terms and least risk in the industry.
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Engineering, Procurement & Construction Contracts
The most common construction contract used in project finance is the engineering, procurement, and construction (EPC) contract. An EPC contract generally provides for the obligation of the contractor to build and deliver the project for a specified price, by a specified date, according to the construction specifications, all of which combined are known as turnkey. More
The terms EPC contract and turnkey contract are interchangeable. EPC stands for engineering (design), procurement and construction. Turnkey is based on the idea that when the owner takes delivery of the facility all it will need to do is turn the key and the facility will function as intended. Alternative forms of construction contract are a project management approach and alliance contracting. Basic contents of an EPC contract are:
- Description of the project
- Completion date
- Completion guarantee and Liquidated Damages
- Performance guarantee and Liquidated Damages
- Cap under Liquidated Damages
An agreement between the project company and a public entity (the contracting authority) is called a concession deed. The concession agreement concedes the use of a government asset, such as a plot of land, to the project company for a specified period. A concession deed is found in most projects which involve government such as infrastructure projects. More
The concession agreement may be signed by a national, regional or municipal government. Concession agreements include contracts for the following:
- Toll-roads or tunnels for which the concession agreement grants a right to collect tolls
- Transportation system like commuter rail for which the public pays fares to private company
- Utility projects where payments are made by a municipality or by end-users
- Ports and airports where payments are usually made by airlines or shipping companies
- Other public sector projects such as schools, hospitals or government buildings
Operation And Maintenance Agreement
An Operation and Maintenance (O&M) Agreement is an agreement between the project company and the operator of the project. The project company delegates the operation, maintenance and often performance management of the project to a reputable operator with expertise in the industry. More
The operator could be one of the sponsors of the project company or it can be a third-party operator. In some cases, the project company may itself act as the operator of the project who is responsible for the operations and maintenance of the project and may eventually arrange for the technical assistance of an experienced company under a technical assistance agreement. Basic contents of an O&M contract are:
- Definition of the service
- Operator responsibility
- Provision regarding the services rendered
- Liquidated damages
- Fee provisions
The shareholder’s agreement (SHA) is an agreement between the project sponsors to form a Special Purpose Entity for the project development. This is the most basic of structures held by the sponsors in a project finance transaction. This is an agreement between the sponsors and deals with: More
- Injection of share capital
- Voting requirements
- Resolution of force one
- Dividend policy
- Management of the SPC
- Disposal and pre-emption rights
Project finance is the lending structure that has financed a great many of the massive infrastructure and sovereign projects in emerging market countries throughout the world.
Project lenders ordinarily require the establishment of a direct relationship with themselves and counterparties to the contract which is accomplished through the use of a Tripartite Deed. The Tripartite Deed is sometimes referred to as a consent deed, direct agreement or side agreement. More
The circumstances under which the project lender may step in to remedy any default under the project documents are enumerated in the Tripartite Deed. Although Tripartite Deeds often gives rise to difficult negotiating issues, the document is critical to a properly documented project financing. Tripartite Deeds typically contain the following provisions:
Acknowledgment of Security
Confirmation by the contractor or relevant party that it consents to the lender taking security over the relevant project contracts.
Notice of Default
An obligation of the relevant project counterparty to notify the lenders directly of defaults by the project company under the relevant contract.
Step-in Rights and Extended Periods
To ensure that the lenders will have sufficient notice period to enable it to remedy any breach by the borrower.
An acknowledgment by the relevant party regarding the appointment of a receiver by the lenders under the relevant contract and that the receiver may continue the borrower’s performance under the contract.
Sale of Asset
Terms and conditions under which the lenders may transfer the borrower’s entitlements under the relevant contract.
The Loan Agreement governs the relationship between the lenders and the Special Purpose Entity borrower. It determines the basis on which the loan can be drawn and repaid, and contains the usual provisions found in a corporate loan agreement. More
It also contains any specialty clauses to cover specific requirements of the project and project documents. Basic terms of a loan agreement include the following provisions:
- General conditions precedent
- Conditions precedent to each drawdown
- Availability period, during which the borrower is obliged to pay a commitment fee
- Drawdown mechanics
- An interest clause, charged at a margin over base rate
- A repayment clause
- Financial covenants – calculation of key project metrics / ratios and covenants
- Dividend restrictions
- Representations and warranties
- The illegality clause
In the event the project financing requires a consortium of lenders, an Intercreditor Agreement will likely be required. An Intercreditor Agreement is an agreement between the primary lenders who are providing the financing to the project company. It governs the common terms and relationships among the lenders in respect of the borrower’s obligations. More
If there is a mezzanine funding component, the terms of subordination and other principles to apply as between the senior debt providers and the mezzanine debt providers. Intercreditor Agreements will specify provisions including the following:
- Common terms
- Order of drawdown
- Cashflow waterfall
- Limitation on ability of creditors to vary rights
- Voting rights
- Notification of defaults
- Order of applying the proceeds of debt recovery
An Off-Take Agreement is a contractual agreement between the project owner, which is very likely an Special Purpose Entity, and the off-taker. Their contractual role established in the Project Finance Documents can be vitally important to the project financing. An off-taker agrees to purchase or sell a substantial portion of the project’s future production. More
Bulk pricing which is attractive to the off-taker and, in return, the off-taker guarantees that the project has pre-sold all or a substantial portion of its output, significantly reducing project risk.
Off-Take Agreements provide the project with stable, guaranteed revenue to pay debt service and operating expenses and significantly improve the likelihood of successfully financing the project.
Take or Pay Contracts
Off-Take Agreements are typically Take or Pay Contracts that require the off-taker to pay for the products on a regular basis whether or not the off-taker actually takes delivery of the products.
Power Purchase Agreements
Power Purchase Agreements are Off-Take Agreements commonly used with electrical power projects in emerging markets. In this circumstance, the off-taker is usually a government entity that is required to buy the power or utilities.
With Take-and-Pay Contracts, the off-taker only pays for the product taken on an agreed price basis.
Contract for Differences
With Contract for Differences the project company sells its product into the market and not to the off-taker or hedging counterpart. If however market prices are below agreed upon levels, the off-taker pays the difference to the project company, and vice versa, if prices are above agreed upon levels.
Hedging Contracts are used in commodity markets such as in an oilfield project.
Long-Term Sales Contracts
With long-term sales contracts, the off-taker agrees to take agreed-upon quantities of the resource or product from the project. Under this structure, prices are not established in advance. Instead, prices are based on market prices at the time of purchase or an agreed market index, subject to certain contractual floor prices.
They are commonly included in Project Finance Documents for mining, oil and gas, and petrochemical projects where the project company wants to ensure that its product can easily be sold in international markets, but the off-taker is unwilling to bear price risk.
Throughput Contracts apply when the user of a pipeline agrees to use the pipeline to carry not less than a specified volume of product at a contractually specified minimum price.
Project Finance was first used in 1299 to finance development of English silver mines. England repaid the Italian merchant bank who funded the project with the output from the mines.
Common Terms Agreement
An agreement between the financing parties (lenders) and the project company which sets out the terms that are common to all the financing instruments and the relationship between them (including definitions, conditions, order of drawdowns, project accounts, voting powers for waivers and amendments). A common terms agreement greatly clarifies and simplifies the multi-sourcing of finance for a project and ensures that the parties have a common understanding of key definitions and critical events.
A supply agreement is between the project company and a contractor who supplies required materials such as feedstock or fuel.
If a project company has an off-take contract, the supply contract is usually structured to match the general terms of the off-take contract for items such as the length of the contract, force majeure provisions, etc. The volume of input supplies required by the project company is usually linked to output. More
Example under a PPA the power purchaser who does not require power can ask the project to shut down the power plant and continue to pay the capacity payment – in such case the project company needs to ensure its obligations to buy fuel can be reduced in parallel. The degree of commitment by the supplier can vary.
Primary supply agreements can be fixed supply where the supplier agrees to provide a fixed quantity of supplies to the project company on an agreed schedule or a variable supply between an agreed maximum and minimum. The supply may be under a take-or-pay or take-and-pay.
Supply agreements may provide for an interruptible supply where some supplies are offered on a lower-cost but interruptible. They may also be structured as a tolling contract where the supplier has no commitment to supply at all, and may choose not to do so if the supplies can be used more profitably elsewhere. However, the availability charge must be paid to the project company.
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